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Income Protection Insurance

Get tailored made income protection insurance cover on your terms

Last updated on May 4th, 2022 at 03:22 pm by Bill Tsouvalas

Income protection insurance

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Did you know up to 84% of Australians don’t have adequate income protection insurance? Worryingly, Australians are three percent less likely to have coverage compared with similar industrialised nations. Income protection is vital if you want to protect your family’s financial security in the event you cannot work due to major illness, injury or sudden redundancy.

Savvy assists families and individuals find the correct level of cover with the highest amount of benefits. We help you through terms and conditions and everything you need to know about your coverage so you can rest easy.

Insurance that suits you

Savvy’s team of professional insurance brokers help find a level of income protection cover that suits your situation and needs.

  • We help employees, entrepreneurs, small business owners and the self-employed
  • No medical tests required
  • We find cover for people who require a guaranteed gross income of up to 85%
  • Choose between stepped or level premiums
  • Find premiums with cover for involuntary redundancy
  • Ask about additional benefits and extras cover
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Why Choose Savvy?

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Save time online

Get a free and no obligation quote with us. Our professionals are here to help you through the process, step-by-step.
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Coverage for every situation

here’s no such thing as one size fits all, so our insurance consultants find the most suitable coverage on your terms.
Private or dealer? The choice is yours

Choose your level of cover

With Savvy, you get choice. We can help you find premiums with short waiting periods (two weeks), lump sum payments and agreed value.
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Options for disabilities

Ask about stepping up your income protection insurance with trauma, accidental death and/or total permanent disability insurance.
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No worries

Savvy helps find premiums with involuntary redundancy cover and never worry about where your next pay cheque is coming from.
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Optional cover

With Savvy, you have an option to get covered for involuntary redundancy to you help you while you’re actively seeking work.

Income protection insurance explained

If you’re experiencing health problems and you can’t work, paying the bills can be a nightmare. Whether you’re supporting a family or living alone, income protection insurance can help ease your financial stress. Find out how income protection works and how to find and compare the best policies for your circumstances

What is income protection insurance and how does it work?

If you are sick or injured, and you can’t work for a while, your income protection policy will pay you a wage until you can get back on your feet. If you are forced to cut down to part-time hours because of your health, the insurance can pay part of your salary. Of course, your doctor will need to provide proof of your medical condition, and there are limits on how much the insurer will pay you, and for how long. There are several aspects of income protection insurance that you’ll have to consider before taking out a policy.

Agreed vs indemnity income protection insurance

If you’ve been looking for income protection insurance online, you may have come across the terms ‘agreed’ and ‘indemnity.’

Agreed-value policies pay out an amount that is specified in the contract. Indemnity policies, on the other hand, pay a benefit that’s based on how much you’re earning at the time you make the claim. They may also look into your average earnings for the 12-18 months prior to the claim.

Insurers are no longer allowed to issue agreed value income protection policies in Australia, so we’ll be focusing on indemnity policies.

There are a couple of important things to be aware of with an indemnity policy:

  • Income decreases – Let’s assume you insured yourself for a full-time wage. However, at the time you make a claim, you are only working part-time. The insurer will pay out your insurance based on your part-time wages.
  • Income increases – Now let’s assume you insured yourself for $3K per month, but over time, you grow professionally. At the time of your claim, you are earning $5K per month. Because your policy only covers $3K, that’s how much you will be paid out.
 

Income protection insurance eligibility criteria

You might be surprised to learn that income protection insurance is open to a wide variety of people, including the following:

  • Part-time workers – The insurer may have a minimum work requirement. For example, they may only insure people who work at least 20 hours per week.
  • Self-employed individuals
  • Home-makers – Only some insurers offer this product.
 

You have to be under retirement age to qualify. Most insurers have maximum age limits of between 59 and 65.

You may also find that certain aspects of your application may have some bearing on the cost of your premiums. When you’re filling out an income protection insurance application form, the insurer will ask you for the following information:

  • Your age – the older you are, the more expensive your premiums are likely to be.
  • The type of work you do – If your work is high-risk, then your premiums may be more expensive.
  • Your income, including commissions.
  • Your medical history – An insurer may not cover your pre-existing illnesses. Or they may offer to cover them but will charge you higher premiums.
  • Your lifestyle – Certain lifestyle choices, for example smoking or heavy drinking, increase your risk of developing health problems and drive up your insurance premiums.
  • If you have any high-risk hobbies like skydiving.

What does income protection insurance cover?

Currently, there are no limits on how much income protection policies can cover. However, most will only cover around 75-85% of your income so that you have an incentive to get back to work as soon as you’re able.

From the 1st of July 2021, APRA is introducing new rules. Insurers can cover up to 100% of your wages for the first six months you are sick. After that, the maximum benefit they can pay you is 75% of your salary.

Insurers usually impose an absolute limit too. For example, they may cover 75% of your salary, up to a maximum limit of $12K per month. If you’re lucky enough to earn $20K per month, then 75% of your salary is $15K, but the insurer won’t pay you more than $12K per month if this limit is in place.

It’s important to note that the more you’re covered for, the more you’ll pay in premiums. When you’re deciding how much insurance to apply for, it’s a good idea to draw up a list of your day-to-day expenses and debt repayments. Remember to also factor in a buffer in case unexpected expenses pop up.

However, there are some illnesses and injuries that income protection won’t cover. These vary from insurer to insurer, so it’s best to read the policy document carefully before you sign up, but can include:

  • Self-inflicted injuries
  • Normal pregnancy – If you have long-term complications that continue after your maternity leave is over that stop you from going back to work, then you may be able to claim income protection.
  • Mental disorders – Some insurers do cover mental disorders, but there are usually strict limitations on what you can and can’t claim.
  • Some elective surgeries

 

Insurers may also refuse claims where an illness or injury was the result of:

  • Misusing alcohol or drugs;
  • Illegal activities; and
  • War or civil unrest.

How do I compare income protection insurance policies?

It’s easy to assume that the best income protection insurance is the one that gives you the highest level of cover for the lowest premium. While both these factors are important, there are several other factors you should consider when comparing income protections policies:

Waiting periods

All income protection policies have a waiting period, usually between 30 and 90 days. This means that for the first 30-90 days, you need to rely on your savings and leave entitlements. After the waiting period is over, the insurance benefit will kick in. If you recover before the waiting period is over, then you can’t claim your insurance.

Policies with shorter waiting periods are more expensive. While you may be tempted to buy the cheapest one with the longest waiting period, it’s important to consider how you will get by without an income for 90 days. Have you got enough saved or family that’s willing to support you for that long?

It’s also important that you read the fine print on this. Some insurers start the waiting period on the day you make the claim, while others backdate it to the day you stopped working due to illness.

Benefit periods

Because income protection insurance is designed to be temporary, the insurer will only pay you a wage for a set period of time. Most offer benefit periods of 2 or 5 years. Some will pay you an income until you turn 65.

Generally speaking, the longer your benefit period is, the more expensive your premiums will be.

Types of premiums

As you age, your risk of developing health problems increases, making you more expensive to insure. Insurers factor this into their calculations and offer two main types of premiums: stepped and level.

Stepped premiums increase annually to cover the extra risk as you age. Some insurers implement the increase each year on your birthday, while others increase your premium on the anniversary of the day you took out the policy.

Level premiums don’t change annually. Instead, the insurer charges you a higher premium from the start but keeps it flat over the life of your policy. This means that in the early years, level premiums are more expensive than stepped premiums, but in the later years stepped premiums become more expensive.

Extra features

Insurers sometimes offer add-ons to their income protection policies. Redundancy insurance is a classic example of this. Income protection only covers you if you can’t work for health reasons. It won’t cover redundancy unless you pay an extra premium for the redundancy insurance.

How does the tax work on Income protection insurance?

Covered amount

It’s important to note that when insurance policies mention your income, they are usually referring to your pre-tax income. The amount you’re covered for is also pre-tax.

Benefits
The benefit you are paid from an income protection insurance policy is treated as a regular income for tax purposes. You will be taxed at your marginal tax rate.

If you have insurance through your super, they will withhold PAYG tax. Your insurer outside of super may not, so you’ll need to pay income tax directly to the ATO.

Premiums
Insurance premiums are tax-deductible. If you have insurance through your super, the superfund will claim the deduction for you through your super account, and it won’t affect your tax return.

If you have insurance outside of super, you can claim a tax deduction on your tax return as long as you are both the policy owner and the life insured. You can’t claim a tax deduction on a policy that insures someone else, like your spouse.

If you have a policy that mixes income protection with other forms of insurance, such as TPD or redundancy, you can only claim the deduction for the income protection component of the premium.

GST
There is no GST payable on income protection insurance premiums.

Income protection vs other types of insurance

Pros and cons of income protection through your super

PROS

Premiums are paid from your super

If you’re not sure that you can afford the premiums out of your own pocket, using your super to pay for them can be a good option.

Automatic acceptance in superannuation

Many superannuation funds offer automatic insurance to their members upon joining. This means you can be covered without having to disclose any information about your health and lifestyle.

Insurance through super can be cheaper

The insurance attached to superannuation is a group policy. Effectively the super fund is buying insurance in bulk, and so they can have cheaper premiums than if you were to buy a stand-alone policy for yourself.

CONS

Premiums eat into your super

Your insurance premiums can reduce your super balance, leaving you with less upon retirement. You can compensate by topping up your super balance, but there are limits on how much you can pay into super.

Less flexibility

Insurance purchased outside of super comes with a lot more options. For example, you can opt to increase your cover in line with inflation or add a redundancy component.

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Income protection insurance faqs

Do income protection insurance policies have a surrender value?

No. If you don’t claim on the policy, you can’t get your premiums back. The only exception to this is the cooling-off period during which you can cancel your policy and get a refund.

Does income protection insurance expire?

APRA has recently introduced new rules for income protection insurance. Contracts now have to be renewed every 5 years so that the terms and conditions are up to date. Your insurer must give you the option to renew without extra medical checks. 

Do I have to tell my insurer if my situation changes?

You don’t always have to, but it can be in your best interest. For example, if you reduce your working hours for personal reasons, you may be over-insured and paying more premiums than you have to. On the other hand, if your income goes up, your cover may not be enough.

Can I increase my income protection insurance without health checks?

Usually, if you apply for more cover, you have to complete the same extensive health checks that you would for a new policy. However, for certain life events, your insurer may be willing to streamline the process. For example, if you get a pay rise or a promotion, the insurer may be willing to increase your insurance without extensive health checks.

You will still have to answer a few health questions and provide proof of the wage increase and the date it started. There will also likely be rules around how quickly you must inform the insurer after the raise.

Does income protection insurance cover bonuses or superannuation?

While income protection will cover your commissions, it doesn’t usually cover bonuses. Many policies do cover super entitlements, which they will contribute to your super fund on your behalf, if you make a claim.

Can I claim work cover and income protection?

You can make a claim on more than one insurance policy, whether they are both income protection policies or one is work cover. However, it’s important to note that your total income can’t exceed the insured amount.

For example, say you have work cover, and you also have an income protection policy that covers you for 75% of your salary. If you get injured at work and work cover pays you 60% of your salary, the insurer may step in and pay the remaining 15% so that you are receiving 75% in total.

Do I have to keep paying my premiums while claiming income protection insurance?

You will need to keep paying your insurance premiums during the waiting period, or your insurance can lapse. Once you start receiving a benefit, however, you don’t have to pay premiums until the benefit payments stop.

Can I pause my income protection insurance?

Your insurer may allow you to temporarily stop paying premiums for any of the following reasons:

  • Financial hardship
  • Maternity leave
  • Unpaid leave
  • Unemployment

 

There are limits on how long you can pause the insurance, and if you become sick or injured during the pause, you won’t be able to make a claim.

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